The End of the US-China Relationship

From an unnecessary trade war to an increasingly desperate coronavirus war, two angry countries are trapped in a blame game with no easy way out. Now more than ever, both sides need to contemplate the economic and geopolitical consequences of a full rupture.

NEW HAVEN – It didn’t have to end this way, but the die is now cast. After 48 years of painstaking progress, a major rupture of the US-China relationship is at hand. This is a tragic outcome for both sides – and for the world. From an unnecessary trade war to an increasingly desperate coronavirus war, two angry countries are trapped in a blame game with no easy way out.

A nationalistic American public is fed up with China. According to a new poll by the Pew Research Center, 66% of US citizens now view China in an unfavorable light – six points worse than last summer and the highest negative reading since Pew introduced this question some 15 years ago. While this shift was more evident for Republicans, those older than 50, and college graduates, unfavorable sentiment among Democrats, younger cohorts, and the less educated also hit record highs.

An equally nationalistic Chinese public is also irate at the United States. That is not just because President Donald Trump insisted on dubbing a global pandemic the “Chinese virus.” It is also because whispers turned into shouts linking the outbreak of COVID-19 to alleged suspicious activities at the Wuhan National Biosafety Laboratory.

Just as most children are taught that two wrongs don’t make a right, tit-for-tat blame does not justify severing the world’s most important bilateral relationship. But the time for dispassionate logic is over. We must, instead, contemplate the harsh consequences of this rupture.

Both economies, entwined in a deeply embedded codependency, will be hurt. China stands to lose its largest source of foreign demand, at a time when exports still account for 20% of its GDP. It will also lose access to US technology components required to advance indigenous innovation. And the loss of a currency anchor to the US dollar could lead to greater financial instability.

But the consequences will similarly be problematic for the US, which will lose a major source of low-cost goods that income-constrained consumers have long counted on to make ends meet. A growth-starved US economy will also lose a major source of external demand, because China has become America’s third-largest and fastest-growing export market. And the US will lose its largest source of foreign demand for Treasury securities, all the more worrisome in light of the looming funding requirements of the biggest government deficits in history.

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This rupture does not come as a great surprise. As is the case in interpersonal relationships, geopolitical codependency can lead to conflict, especially if one partner starts to go its own way. And China’s decade of rebalancing – shifting away from exports and investment to consumer-led growth, from manufacturing to services, from surplus saving to saving absorption, and from imported to indigenous innovation – did indeed put it on a very different path.

This turned out to be an increasingly uncomfortable development for a China-dependent US. Left behind, America felt scorned, and that scorn led first to blame, and now to open conflict.

Although these tectonic shifts will leave most Americans worse off, the US seems to be shrugging its collective shoulders. America First has resonated with widespread wariness of globalization (now reinforced by concerns over supply-chain vulnerability). Many Americans are angry over allegedly unfair trade deals and practices, indignant at seemingly disproportionate US funding for institutions like the International Monetary Fund and the World Bank, and suspicious that the US security umbrella in Europe, Asia, and elsewhere encourages free riders and others not paying their fair share.

Paradoxically, this inward turn comes at precisely the moment when America’s already depressed domestic saving is likely to come under enormous pressure from an explosion of pandemic-related government deficits. Not only does that imply deepening current-account and trade deficits (the nemesis of the America First agenda), but it also poses a major challenge to longer-term economic growth.

America’s public debt-to-GDP ratio, which reached 79% in 2019, will now almost certainly go well above the 106% record hit at the end of World War II. With interest rates pinned at zero, no one seems to care. But that’s just the problem: interest rates will not stay at zero forever, and economic growth in an overly indebted US will wither under just the slightest rise in borrowing costs.

Can the broken US-China relationship be salvaged? Ironically, COVID-19 offers an outside chance. Both countries’ leaders would need to end the blame game and begin restoring trust. To do so, they would need to come clean on what really happened in the early days of the pandemic – December for China, and January and February for the US.

This is not a time for false pride or nationalistic bluster. True leaders often emerge – or are revealed – at history’s darkest moments. Is it really too late for Trump and Chinese President Xi Jinping to comprehend what’s at stake and seize this opportunity?

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It is very clear that the thinking in this article is far more part of the problem, and not the solution.

I am sure the writer intended to enlighten us on the political economics that he understands… But he is operating on out of date assumptions and ideology that… ..1. Those of us in the west are not able to modify our globalization activities..2. When we are down we cannot get back up without globalization..3. We do not have leaders that can move on the above4. We do not have a population that now gets it… in terms of the disaster caused by over globalizing our economy and our national composition and culture.

On the contrary… the virus will force us to rethink the above and develop …A far more sustainable economy with far less imports and strong borders in all senses of the word,.Less wasteful immigration and migration.Local labor being utilized in local manufacturing… recapitalized to the next level of productivity.The national slogan will be something like.. “Consume much more of what we make with our own resources”. When will the globalists admit that this huge wealth transfer journey has been the wrong one for the west and that a global order is just not going to work with a high wealth gradient between nations…...These globalists, who had their evil way in the President Clinton years, ..still try to preach globalization dependent multilateralism, when the solution is a move away from unneeded multilateralism and global dependency and a strong move toward localized sustainability. Let us not mix geo-political stability with economics.. and that is exactly been our mistake..

We can only hope that such jaded, outdated and dangerous thought leading that still gets the press time on this site will soon be replaced with more realistic thinking that acts in the best interest of citizens of nations rather than these international dependencies..

I agree with all that you say but would add that I expect the globalists realise that “this huge wealth transfer journey has been the wrong one for the west” but has been the right one for them since the rich of the rich countries have, in the process, become even wealthier themselves.

As of the 1930s, Hitler had done nothing directly opposed to American interests and was in fact hoping America would at least remain neutral and possibly become Germany's ally. The situation with China today is very different--China is certainly trying to take us on economically and, considering their military build-up over the last few years, may be considering taking us on militarily. And, as I suggested, I'm not convinced that COVID-19 was an accident. It's release in China may have been accidental, but I wouldn't put it past them to have deliberately dumped it on the rest of the world.

When more people would have some knowledge about how the supply chains between China and the rest of the world started and work and that there was some awareness among people in the developed world how they profited and still profit of the cheap labour provided in factories set up in China's special economic zones by companies from the same developed world, the discussion would be a bit easier.

Decades went on since 1980 and consumers in the developed world were able to buy cheapies like Walmart's XXXL T-shirts till the hi-end California designed iPhones and all of the sudden many people in the Evening land, Japan and Korea realized, hey, the Chinaman is getting more wealthy and searching for political influence. Let them join the WTO and send more Mercedeses, Gucci bags to the growing middleclass, sell Boeings, Airbusses to transport them and more Midwest soybeans as they like meat and Big Macs too, roll out Starbucks to learn them drink coffee in plastic cups. [ IP theft of the Italian coffee culture by the way...]Narratives appeared that in the hundreds of joint ventures between Chinese and foreign companies intellectual property theft took place, which was often true but sometimes exaggerated.As during this month the defeat of Germany in 1945 is celebrated in many countries it's forgotten that after that defeat Operation Paperclip took place with 6000 German engineers and scientists being forced to work for the Allies [read the US] bringing with them the intellectual property of inventions and innovations never seen before. In those days they called that war booty but actually it was just plain theft.When historical awareness doesn't reach further than the last consumed cheeseburger one misses that a long, long time ago Europeans travelled to China and brought back after many years items like gunpowder and the early version of the compass.China and also India are, by the way, just restoring the position they had around 1500.

Many Americans think that they should decouple from China and bring back manufacturing to the US. The chances that this will happen in any foreseeable future is not positive. Besides the manufacturing companies involved with the US military industrial complex there's not much of a manufacturing grid left. Building a production line can be done pretty quick but to make it lean and efficient and staffed by skilled workers is another story. Most workers of the millennial age either prefer a white collar job in the service sector or when they missed college lack the right skills and attitude for a solid manufacturing job. Among younger Americans there's also a huge addiction problem ranging from crystal med to oxycodon which is not promising either.Migrants from the other America's lack language skills but are always an option for manufacturing jobs but established Americans, the ancestors of former migrants, don't want them to come.Producing an iPhone on US soil can be theoretically done in fully automated plants with limited high skill jobs, not those jobs promised by the current Commander in Chief for Joe and Jennifer.

A reader here wants 'to crush China' but what the options are remains unclear. It's clear that China was downplaying the outbreak in December 2019 but the so-called proof that the virus escaped from a lab by the Trump administration is not verified by the combined intelligence agencies of a few Western nations. Most scientists think that the wet market situation and animal to human transition taken place there as the most likeable source.

The same reader is so obsessed by China hurting American interests that he missed the context of what a former US ambassador said today on CNN. That the created anti -China atmosphere in the American society resembles, or is about to resemble, the atmosphere of Germany in the 1930s when Hitler came to power.

I feel sorry for people with a 'Chinese appearance' in the US for the coming time. Watch your windows.

Or, you could put it that America/Trump has declined to support further its disloyal allies, Germany in particular. Nor does it continue support of institutions which do not further its aims; just as does China, nor Russia who manipulate the UN and WHO. And countries as diverse as Pakistan and Germany are awakening to the intrusion/imperialism of B&R. Roach objects to the remaking of American involvement in the world, an involvement which continues politically, commercially, religiously, and socially.

Trade war, coronavirus war, a new “cold war” are leading Washington and Beijing towards actual war – world war. Events are following the pattern of history. The greatest danger is not the unfolding events in themselves, but the illusion this hegemonic rivalry will end peacefully.https://www.ghostsofhistory.wordpress.com/

Two ICBM owning nations can never go to war. Just like the US and USSR could never do so. Simulations show that even a nuclear war between India and Pakistan would plunge the World into a nuclear winter so severe that only the cockroaches in the Sahara would survive.

The end of idealism for the China:US relationship ended years ago. It exists now only in the ivory halls of Yale University, with its professors, who built their business careers in the financial industry fostering business relationships with China, caught wrong-footed.

Roach is all wrong - he assumes MAGA doctrine remains inward looking, or advisors and circumstances don't create a MAGA with friends approach. NATO still exists.....Germany sent China the bill for this pandemic, not the most friendly act......British re-thinking Huwaei (it would not be approved today in Parliament according to Dominic Raab)....what is more obvious is that their are more things in common in the West, our shared heritage, and that more than likely post-Trump politicians reconfigure the West into a new Cold War accommodation. Seize the opportunity? Real leaders??? The Chinese closed internal air travel while sending out millions around the world after human-to-human transmission had been confirmed. They are communists! They are evil! This project of making them responsible stake-holders failed. They basically said - if we are going to suffer, lets make sure everyone else suffers worse. The only rational, sane, intelligent, and AMERICAN response is to repatriate business home, close access to US visas, remove Chinese students, strengthen nuclear deterrent, sign trade agreements with allies South Korea, Japan, and publicly show our friendship and support of Taiwan. Tax-payer support for grants to build 5G in coordination with European friends.....the relationship with the Communists (which sane conservatives knew was a mistake) is OVER!

The German government hasn’t billed China for “coronavirus damages”. A German newspaper drew up a mock bill but the German government has not sent a bill, as suggested. https://fullfact.org/health/coronavirus-damages-germany/

In this new era of de facto MMT, why can’t interest rates stay at zero forever? And debt to GDP go to infinity? The old argument that doing so would led to runaway inflation has been obliterated by the global economy’s response the various QE’s of the last decade. Furthermore, we don’t need to talk about printing money anymore. With electronic money, we quietly move the decimal point the necessary number of digits to the right to “create wealth”. Since we no longer have any standard against which to measure the value of anyone’s money (a roll formerly occupied by gold), it is hard to perceive any reason the current economic regime cannot continue indefinitely.

Servicing the debt you say? Just add the necessary digits.

If there is some double top secret inevitable alternative to this scenario, I have not heard it.

Interest rates cannot stay at zero forever?Well there are interest rates for some an interest rates for othersWhat happens to money when it is liberally printed for the connected example airlinesIs money truly meaningful then?Money then is no longer anonymous The flow pours on the connected and others the rabble get the scrapsThere was a quote in the Bible related to the poor feeding off the scraps on the floor with the dogsThe scraps that fell off the tableGovernment largess to the connected will dominate everything. No individual of ability can compete then except for scraps. As the connected get the largess purely based on government decreeIs this not communist or is it fascist?Or just corruption?

I find this article bizarre, deluded.Coming from a v experienced well educated American economist, businessman.Thus it somehow sees this dispute as between two entities working off the same rules system.Which is nonsense.Basically blinkered authoritarian insecure Old World China is playing by its own rules, like did the Soviet Union.The US, for better or worse, more or less, subscribes to the goal of a liberal international order - as do near all the world's governments, more or less, with a few obvious exceptions - ie based on transparency and fairness, whatever the imperfections in practice.Covid 19 has graphically exposed this contrast, this gulf, with the true to form Chinese Government now strenuously resisting the eminently logical follow up of a/ a full post mortem on the virus outbreak and spread; and b/ remedial institutional reform for the world to be better prepared next time.

"From an unnecessary trade war to an increasingly desperate coronavirus war, two angry countries are trapped in a blame game with no easy way out. Now more than ever, both sides need to contemplate the economic and geopolitical consequences of a full rupture."No. One side has to decide if it wants to join the liberal modern world. At last.Trusting people with responsible freedom and transparency.Or stayed trapped in an anxious, blinkered, insecure, reactionary past.Which their reaction to Covid 19 has exposed in full headlights.

That's a deeply assertive statement, William. What if this modern liberal order is an indulgence that only a few of us can afford, built on three hundred and fifty years of systematic global looting and slavery, the losers of which are finally coming looking for what is theirs? What is liberalism propped up on if not relative-comfort? And even within the privileged nations collective enthusiasm for the modern liberal order is waning. China is a reflection of the West, the other side of the present, not some out-dated draconian nation that needs to get with the times.

The article is prescient but somewhat outdated in three of it assumptions:

1. China stands to lose its largest source of foreign demand? The US is China's #3 trading partner, after ASEA and the EU.

2. exports still account for 20% of China's GDP? Exports account for 17% of China's GDP and exports to the US account for 15% of that.

3. China will also lose access to US technology components required to advance indigenous innovation? China leads the US in basic research and most technologies and outspends the US 4:1 on R&D, PPP.

4. The loss of a currency anchor to the US dollar could lead to greater financial instability? The entire world is looking to escape US dollar hegemony. China has an alternative reserve currency, SDRs, and the (digital) yuan is stable and backed by a more vibrant economy and more gold reserves than the USD.

When the comparative advantage of trading with China is the low cost of their labour, this must translate into a transfer of wealth from America to China.Far better for America to bring that wealth back and make stuff at home instead. It may cost more to buy but at least they will be better off!

They may well have increased dramatically over the decades and, they well now make everything but, a quick Google search will reveal that the current average Chinese wage is approximately one tenth of the current average American wage.

Too many Americans believe in this narrative. Especially for the hi-end products it may not just cost more but will be unaffordable for most US consumers. More important is the US lacks the manufacturing grid to ‘make stuff at home’, the skills and skilled workers. Take a look at US companies with most employees..what do they do?It takes years to establish a lean production line and to educate the workforce to make that possible.

It is agreed we have let manufacturing go a lot for too long....but in most sectors it will not be mission impossible to take manufacturing back.... plus, we won’t have a choice.... always a great motivator.... We taught the Chinese how to make our products ..we can teach ourselves.. again!

There’s a lot of commitment in the EU for bringing essential manufacturing of medicines and for example PPEs back to the region, an early outcome of the Covid-19 pandemic. A bed manufacturer and a chemical giant took the initiative for the production of PPEs as this EU country was facing huge shortages. They are producing now after the machines Made in China arrived...Europe has an state-of the art manufacturing industry with in most countries flexible and skilled workers.I’ve been working for an US multinational for many years and was in the position to compare workers of the US, the EU and China in simular plants [ with US technology! ] It was pretty obvious that the US workers couldn’t keep up on many fields from skills, flexibility to bad labour conditions. In my other post I was hinting on the large service industry in the US with too many people performing low-skilled jobs. Ofcourse is the US home to state-of-art manufacturing with excellent skilled workers but these companies are often connected to the huge military-industrial complex.It’s good to educate young people for a sustainable ‘blue collar’ job but the circumstances on the US labor market are not that promising as so many other factors are at stake. Take for example the huge addiction problems.Anyhow it’s good to bring back essential industry back just to avoid future shortages as this will be not the last pandemic. More than 60% of the Americans may be fed up with the Chinese but decoupling wil not be that easy as it looks.Take also in mind that GM produces more cars in China than in the US, Tesla opened a fully-owned plant in China and Boeing is still planning to start up a production line in that country because it’s the future market. German car manufacturers on US soil produce also cars for export to China and elsewhere. American soybean farmers need China and the Trump administration can’t subsidize them till enternity.Supply chains will change more after this pandemic but they were actually already changing with for example industries moving to other countries outside China.It seems that many Americans are choosing for isolation on that America First mantra but history shows where that leads to. Just ask the Chinese.

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